History's Second-Quarter Standouts

March 23, 2004

By Sam Stovall Can you track stock-price movements by the calendar? If the quarterly performances since 1990 of S&P subindustry indexes are any indication, the answer appears to be yes. Coming up with the reason why may prove to be a bit more challenging, however. Take a look at the table below, which shows the 20 subindustries with the best and worst frequency of outperforming the S&P 500-stock index during the second quarter of each year from 1990 through 2003, along with the average rise or fall for that index.

The S&P analysts I spoke with were skeptical about investing on quarterly price patterns alone, but they did indicate that there may be a reason these subindustries did well or poorly during this period. They also reminded me that since investors are anticipators, a strong second-quarter price performance was likely due to the prospects of improving fundamentals in subsequent, rather than concurrent, quarters.

While I don't have the space available to give an explanation for all subindustries listed, I will share the thoughts of the analysts that cover some of the best-performing groups:

Consumer-finance companies, like American Express (AXP

; S&P rank 3 STARS, or buy; recent price, $51.08) and Sallie Mae (SLM

; 3 STARS; $40.86), may have done well due to an expected pickup in school-loan demand, vacation planning, or consumers buying on credit what they hope to be able to pay for from their expected tax refunds.

CAN KICK. For technology industries, like semiconductors and software, quarterly performances may simply be a sequential series of movements. The fourth quarter is typically the strongest for tech companies, when most orders are placed for the coming year. That's when the annual budget flush occurs, when the "use it or lose it" mentality causes a pickup in yearend spending. The second-quarter rise may therefore be just a recovery from the first-quarter lull -- which then leads to a third-quarter slumber.

Second-Quarter Performances (w/o dividends) 1990-2003

S&P Subindustry

Avg. % chg.

Freq. of outperformance

Consumer Finance

8%

86%

Commercial Printing

8%

71%

Systems Software

8%

71%

Home Improvement Retail

7%

64%

Aluminum

6%

64%

Pharmaceuticals

6%

64%

Semiconductors

5%

64%

Multi-line Insurance

5%

64%

Diversified Chemicals

5%

64%

Broadcasting & Cable TV

5%

64%

S&P 500

3%

NA

Apparel, Accessories & Luxury Goods

-1%

21%

Food Retail

0%

21%

Oil & Gas Exploration & Production

-1%

29%

Airlines

1%

29%

Office Services & Supplies

2%

29%

Specialty Chemicals

2%

29%

Life & Health Insurance

2%

29%

Specialty Stores

2%

29%

Movies & Entertainment

2%

29%

Construction & Engineering

2%

29%

It makes sense that the home-improvement retail group, which includes the likes of Home Depot (HD

; 4 STARS, or accumulate; $36.68) and Lowe's (LOW

; 4 STARS; $54.32), does well in the second quarter, as homeowners gear up for repair chores during the warmer summer months.

And finally the aluminum group, lead by Alcoa (AA

; 4 STARS; $34.86) may be a standout, as the metal finds its way into the beverage cans that will be consumed on the beach or at backyard barbecues in the months to come.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of March 19, 2004.